Penumbra, Inc. (PEN) Earnings Call Transcript & Summary

Thanks for coming to one of the last presentations of the day. For medtech, we welcome to have Penumbra, Adam Elsesser, CEO. So glad to be here. Thank you.

Great.

So I guess just before we get into like the Q1 and all this stuff, given some of the focus on competition and stuff, I just love to like level-set where you think we are in like the different markets you're in, like in terms of TAM and penetration, if you look at both stroke, arterial and venous just kind of take the 3 down and kind of see where we are today.

Yes. So from a penetration standpoint, where stroke is at about 25 -- let's use U.S. numbers just to be easier. We're about 25% penetrated. That stalled -- that went down a little at the beginning of the pandemic. It's come back up, but it hasn't grown yet past that. We can talk about why and how to -- we think that will grow in the future. In the other interventional markets, both arterial, DVT and PE, all 3 of them we think we're less, around 10%, maybe a little less than that penetrated. So there's a lot of room to grow that business going forward. And most of that is not mechanical thrombectomy. I mean, there's some, but most of that is traditional means, either tPA, intra -- cathode or tPA or in some cases, around the arterial side, surgery.

And on the competitive front, like Stryker -- let's just take stroke, for example. Like Stryker's called out share loss in ischemic stroke. I don't know if it's gone to you or some of the other product companies the space. But how are you looking at the competitive environment today and stroke and your kind of position in that market?

Yes. So there's a lot of companies out there. Many of them have aspiration catheters. It's sort of a pretty shiny object to go after for a while. I think, as you know, we've talked about, just last week on our earnings call, the idea that the technology that all the great companies, Stryker and Medtronic and others, plus us, have developed really brought the field this far. But I think -- and I think we're seeing some physicians sort of agree as they see it and understand what we're doing with Thunderbolt. I think for us to really continue, there probably needs to be a bit of a paradigm change. And with Thunderbolt, we think we have that. We're excited what -- seeing folks who see it and demonstrate it has -- seems to have sort of reignited a lot of interest and enthusiasm. It was an interesting dynamic recently. I was talking to 3 partners in a lab, all 3 had slightly different techniques. And their immediate reaction was, wow, this would sort of clarify or this would sort of make the procedure sort of uniform. And I think that ultimately isn't bad right now. There are a lot of different techniques, a lot of different products being used. And I think for us to grow, it has to be simplified. And some of the trade-offs, we talked about that on our earnings call, both in stroke and peripheral, that we all needed to build the field. We got to get rid of those trade-offs. We just have to have products that don't have those trade-offs. And we think that both is going to...

And what are those trade-offs?

What's that?

What are the trade-offs you're looking to...

So it depends. Depending on what arterial bed you're talking about, the trade-offs can be either it takes too long. I mean going back to 2008, our first product took over an hour sometimes to get the clot out. That's a trade-off. A clot -- you've all heard the expression time is brain. An hour feels like a long time. But the alternative was you don't get the clot out. Then [ stent tubes ] came along in stroke. They work much faster, but they were dragging a cage through the vasculature. Not something you would ideally do, so that technique has evolved to be used more with aspiration and less of a distance to travel. We just need to get to the point where we're not compromising on those, and we think Thunderbolt could get us there. And so on the arterial side or on the peripheral side, it's some different trade-offs.

Right. Yes, we'll get to Thunderbolt in a minute. But I did want to ask about the competitive environment kind of in the vascular side of the business, it seems like Inari may be moving into arterial next. Just trying to think about like your competitive position in that market since you have a pretty sizable business. I don't know if you want to quantify how big you're...

Yes, yes. Look, I have a great deal of respect for our competitors, and you're never going to get me to say negative things. I think it's taken all of these companies to help bring awareness and drive interest in moving the paradigm from lytic use to mechanical thrombectomy. All I would say is you look at the mechanisms of action. Are there trade-offs? If there are not, then they're going to be a great competitor. But those trade-offs again, in any products, I'm not focusing whether it's too much blood loss or scraping something through the vascular wall or what have you. Those trade-offs really matter. And if you don't have to have any of them, we're going to do okay. And our technology, Lightning, is the core of it. Thunderbolt and Lightning Bolt will build on that. That's totally different. It uses computer-aided technology, which is not something that just manual products use. And it does things very differently. So take Lightning, for example. Not only does it limit blood loss, but it provides you a real-time feedback as to what's happening in the case. So there's auditory and visual clues -- not clues, feedback of where you are. Are you in clot or are you not? If you don't have that, and before we had Lightning, you would sort of move the thing around hoping that you're in a clot. There's no way to know that or see that. The image you're seeing is not live per se. And so that alone without the blood loss element saves time and gives a much better experience because you're not spending as much time doing it. So I think those are the things that customers are reacting to because they're limiting those trade-offs. So we're going to have a lot of competitors since the day we started selling in 2008. We've had competitors. I think it's great ultimately for the field. But innovation, constant, constant innovation has always been how we've done right by patients, and we're particularly confident in these markets that over the next years, our innovation is pretty good.

All right. That's good to hear. I guess just taking a step back at it, looking at the quarter and kind of the full year, like you did say that the first half was tracking ahead of expectations. I assume you've seen pretty good recovery trends in March, April and May. Just curious to how that -- does that play out across the business, kind of broadly across the business? Are there certain areas that are stronger than others? Obviously, maybe wait a little bit more to raise the guidance to the full year. Just any color on what you're seeing near term.

Yes. We just had our earnings call. We're pretty direct as to how we did to -- I don't really want to get into like what did we do in the first week of April or things like that. I hope you guys respect that. But we feel good about where our business is. Again, it comes down to what the products are and the reaction to them. So, so far, so good. That being said, we're living in a weird environment these days. And somebody said there was a report out that contrast is now hard to get or something. I hadn't heard that. We hadn't heard that from hospitals, but that would be a problem for a lot of people, right? So I don't know.

Yes. And then when you look at international, what are you assuming for international? And on the full year guidance, there was some shift to China, $5 million into Q1.

Well, that was just we had expected to have our deal with -- Peripheral signed a little later, so it came in [ a little later ]. I think overall, if you sort of step back, stroke was a little light internationally, OUS in Europe and so on, Japan. We commented why the products that they're selling there now, in Europe particularly, is 3 years old. That's long for us. When our RED series comes in neuro to both Japan and to Europe, I think we'll see an uptick in sort of growth. Overall, again, I feel -- you're never going to have -- when you have different generations and innovation happening and clearances or approvals happening at different times, you're never going to have even growth across all geographies.

Okay. And is China opening up a little bit more from the lockdowns?

You're asking me. Yes, the last time I talked to our distributor was about a week ago, so I'm not really able to give qualified information as to what happens that week.

All right. No, that's fair. I just wanted to ask. And one of the comments on your call kind of struck me was basically saying you're going to see accelerating growth in 2023. Is that because you're kind of confident in your pipeline of products? Is it anything? Is it across the company? As Peripheral is going to accelerate or both stroke and vascular?

Yes. So 3 big new products that we kind of outlined, Thunderbolt, Lightning Bolt and a venous product, those alone will, we think, drive again, growth into -- as we get into '23 and beyond. For the simple reason, again, that as we get rid of all of the trade-offs, and they become even more obvious than we have today, physicians are sort of responding to that. And I can't stress how important that is. If you're still using tPA today, and obviously, the vast majority of the patients that are target market are still getting tPA, with all of the discussion around all the companies and all of the products, you're doing it because you're making a judgment that the trade-offs and current technology aren't good. And so we're not going to get -- treat those patients. As that starts to become more obvious with the technology that we have, I think we'll see that accelerate.

Is it something you can see accelerating growth in kind of all your businesses, both sides of the business?

Yes. I mean we -- again, we have stroke. We've talked about that. With Thunderbolt, we have arterial, we have DVT and PE. And of course, we have coronary which has great data, and we got continue to get out the word and contact and bring that technology to more and more cardiologists.

I remember going to your analyst day in 2019, and you said $1 billion plus by 2023. You're basically -- pretty line of sight for you despite COVID. What's the...

What about that?

And maybe without COVID, the plus would have been bigger. But what's the path to the next billion in sales, 1 to 2? Like how do you see that? And what do you think the mix of your business is?

I mean we've got to double our revenue, right?

Right.

You didn't mean that? Okay. Sorry, I just thought that's what you meant. Sorry, that was a bad joke. Listen, again, if you look at the markets we're in, between stroke and where we're a little more penetrated, but on the vascular side, if we just get another -- even not even to 50%, like to 20% to 30%, we're going to be there. And so we have a fairly good confidence that we're going to see that growth, and we're going to continue to innovate. And again -- and sorry. There's a -- for those listening on the webcast, there's somebody outside yelling, slightly distracting. So that's how we get there. Beyond breaking it down product by product, I think it's a little premature.

Okay. And just kind of breaking down the pipeline. Like Lightning Bolt in the U.S., like timing, like any other details that you want to provide on that product, like how it's going to actually change the paradigm and like the things that you're trying to solve for?

Yes. So what we've said about Thunderbolt, which one can assume the name wasn't just we lost any ability to be creative in our naming, is related. It is -- what we've talked about is to really harness the power of aspiration to its fullest potential. Right now, when you have aspiration going, you have a friction that developed between the clot and the tip of the catheter. And what we are doing with this technology, which is pretty amazing, and it's, again, all driven by computer algorithms in the product itself, not the catheter, but the product that doesn't go in the body is to regulate that friction and, in fact, get rid of it. And if you get rid of the friction, you can aspirate out clot much faster and much more efficiently and pretty high volumes. So we're pretty excited about that, and we think it -- both will work in stroke and the arterial side pretty effectively.

I remember back at the IPO, we all thought of you as a stroke company. You told us that you're going to -- we're going to have this Indigo product that's going to be bigger in stroke someday and I think that actually played out. And now you're telling us like immersive health care is going to be bigger, the biggest business. Like what gives you the confidence in that today? Like you can say that it's almost like I want to believe you, it's like past precedents.

Yes. I mean no reason to believe me because of past precedents. Let's share what we've talked about, what gives me and the company that confidence. Let me start with I'm not like a technology person. I'm not a -- I don't play video games. I didn't get enamored with VR for VR's sake. What I got enamored with is the benefit you can clearly see therapeutically. And that's fairly obvious how that technology can interact with the brain to make people better in a host of use cases. Stroke rehab was the most obvious use case. And many people who have said that, not just me. There's sort of one of the world's experts in VR, a professor at Stanford, wrote a book and talked about stroke as one of the most obvious use cases. That was before. I didn't know that when we started the project, but that's sort of -- it's fairly obvious. So the first and foremost is that it's logically works. What gives me more confidence today than maybe in 2019, we know a lot more. In 2019, when we first started, we would launch -- we launched a relatively contained 1 set of experiences around stroke rehab. Many people we talked to didn't know what VR was then. And so we had to start with, okay, this is what it is and this is why it works and so on and so forth. What we now are experiencing is we're talking to health care providers in a host of the channels that we outlined at our Investor Day last fall, is they all know what VR is and they all already understand how it will potentially help their patients. That's a huge change alone because just in a short period of time that's happened. Also, the technology itself has gotten better. We've developed a lot more apps and experiences. We outlined a bunch of the new ones at our Investor Day. So we also built a totally different model because providers don't want to buy a headset from this company and a headset from that company and this and that. They want appropriately like I want a platform where I can buy the hardware and then I can get and download all the applications. They don't mind paying for them. They pay for what they want, sort of like a PlayStation model or so on. That's new. As a health care medical device company, one isn't used to looking at a gaming model, where an App Store is a logical business model. So we first had to understand that and so on. It's quite, by the way, a profitable business if it works. So we see and hear a very different thing. Now when we're going to these providers and some quite large, the reaction is very different. They get it. They understand it. The real hesitation -- and hesitation's the wrong word, the real limiting factor in the short term, and I think it's fairly short term, is just people to implement it. If your provider owns 300 or 500 facilities, you don't have the people just waiting to go implement across all those facilities. As everyone knows, the health care profession has been impacted pretty hard on personnel. And so that's the biggest thing. That's a relatively short-term thing. And I think we're going to see that as we come out of this downturn, pretty change dramatically. And I think it will fit with the timing of the work that we're doing on a technical basis to have the platform ready. So we watch that. I'm very close to those conversations so that I can judge and gauge that. The other thing is the interest in people being on our platform. Hard to build a platform if no one wants to be on it. But again, we said we'll give those metrics later, but I wouldn't have said we'll give them later if I didn't think we'll have something to say.

Is the business model basically finalized at this point? You kind of understand how that's priced in.

Yes. So we certainly have a feel for it, and we're able to share that to folks. But when you're pioneering something that has never ever been done before, I think it would be premature to say it's all final because as we have these conversations, they might change. But again, the changing -- we're not getting a lot of pushback on pricing is too high. That's not the topic. And so does the model slightly change? Do people want to move things from bucket to bucket? Maybe, but I don't expect that [ to happen ].

But it's a pretty profitable business, you said. Potentially?

Well, potentially. Potentially.

Right, right. Right. And then the 4,000 patients that you've already used this, the way you talked about in the call, what setting of care are they in? Like what did you learn from that?

Yes. So most of those were on the rehab side because that -- we had -- we do have the version of what we call the i-Series, which is more for other applications. So we have some there, but most of them on the rehab side. So that could be in a variety of different settings, whether it's outpatient, just traditional outpatient or inpatient post event. It's in both of those.

Okay. That's fair. And I did want to ask on the P&L, like in terms of like margins. Any particular way you think about the business going to 25% to 30% margins at certain revenue level? How can you actually get this business to going from where it is today to extremely profitable?

Yes. Well, so let's talk about a couple of different pieces there. Let's start with the gross margin. We've shown that we can operate a business with better gross margins. A couple of things happen, and I think we've said this, so I don't think this is new. But I think I'll say it pretty clearly, and that is, we did, at the beginning of COVID, invest pretty heavily in our infrastructure, in people. We had some inefficiencies built in to keep everyone safe. And our margin went down. And that was -- we weren't uptight about it. We grew a lot in the last 2 years. So that was okay. We did announce on our earnings call, in addition to bringing on Sandra Lesenfants, who's here with us today, we also talked about bringing on another senior person named Joe Sendra. Years of experience as sort of head of manufacturing, engineering at J&J across all divisions. Somebody who we knew through some of our senior engineers. An incredible guy, fits our culture. Maybe I'm -- I shouldn't say this, I'm embarrassed to say, but we didn't focus on margins as our #1 priority as, particularly, as we were growing and investing and innovating. He got here, and he did it very politely, but he looked around and was like, well, this is very stupid, we could tighten this up. So we have a lot of confidence that we can grow on the margin side, and I think you'll see it. On the bottom line, just to remind everyone, we started selling product in 2008. We were profitable. The first year we sold product and every year [indiscernible]. Until then, when we went public, I met bankers who told me profitability wasn't how we were judged and so we may have dipped below the line a quarter or two. But we know how to -- 18 years of this business, we know how to run a profitable business. As we move into this new era, I think we started about a month ago talking about it, getting everyone back into sort of fighting weight that we can very carefully and easily titrate how we spend to be profitable. And I think more than ever as we enter this new phase, call it, downturn, recent, whatever term you want, running a profitable business are critical. We get that. We're all over it. We know how to do it. And frankly, the morale at the company, I think, gets better, and we're seeing that over the last month when we started talking about it. So I'm pretty excited about it. I think in these times, strong companies do better. And I think we have an 18-year track record of being a strong, disciplined company, and I think we're going to do pretty well.

So you think in '23, we're going to be talking about the numbers and margin expansion story as well?

I don't even know what that means. You're going to be -- I hope you're talking about a number as an innovator forever.

Right. No numbers on the margin front where this could go?

I am not giving numbers where this can go, but we will be fine.

Yes. Fair, fair statement. That was actually my last question. So if there's anything you had to close with?

No. I think this is one of those rare years where we have just a ton of catalysts. And those catalysts, I wouldn't be talking about them if I didn't have a pretty high level of confidence. I think people know that about me. And you couple that with the discipline that we need to have to be strong during this time in some weird way, stock price aside, I think this plays to our strength.

Right. Great. Thanks, Adam.

Okay. Thank you. Appreciate it, Travis.